In 2011, a leading venture capitalist named Marc Andreessen coined the phrase “software is eating the world." He forecast software companies to penetrate every industry and part of our lives, and he wasn’t wrong. Many software companies operate using my favorite business model, software as a service (SaaS), as which means they are inherently scalable by nature. Once a software system is built, the incremental cost for every unit of value is not proportional. This is why a company such as Meta Platforms (META, Financial) doesn’t need 2 billion employees to support its 2.9 billion users.
However, an issue with software companies from the investor's perspective is they often trade at a high valuations. Their bubble and bust nature makes it easy to lose money betting on them, especially in their early days. Thus, in this article, we will go over two of my favorite software stocks that are trading close to their 52-week lows, which means they are cheaper than usual; let’s dive in.
1. Domo
Domo (DOMO, Financial) is a leading software company that specializes in data analytics and was named as a “challenger” in this industry by Gartner (IT). Organizations collect huge amounts of data from various different processes, but most don’t unlock the true value of this. That is where Domo’s software helps by bridging the gap between multiple different sources and providing analytics, along with visualization.
The big data industry is forecast to expand at a solid 11% compounded annual growth rate (CAGR) between 2021 and 2026, according to estimates from Markets & Markets research. Therefore, Domo is poised to benefit from this trend. The company has already built up an established range of customers which include Zillow (ZG, Financial), Cisco (CSCO, Financial) and more.
Financials recovering
Domo reported mixed financial results for the fourth quarter of its fiscal year 2023. The company generated revenue of $79.62 million, which surpassed analyst forecasts by $2.15 million and rose by ~14% year over year. This may seem great at first glance, but if we zoom out and review the historic financials, the story is not so clear. In 2018, the company achieved a growth rate of 45% year over year. Since that point, its growth rate has been declining, with only 20% top line growth achieved in 2021. This slowing growth rate has caused the founder of Domo, Josh James, to come back as the CEO, after previously leaving in March 2022.
A positive for Domo is its subscription revenue has increased by 18% year over year to $70.3 million. In addition, the company reported a current RPO of $234.8 million, which expanded by 10% year over year.
Domo has also reported an improvement in its operating losses from $30.1 million in the fourth quarter of fiscal 2022 to $16.2 million by the recent quarter. Its loss per share was $0.57, which surpassed analyst forecasts by $0.03.
When a company is still generating a loss, a strong balance sheet is usually necessary to maintain stability and growth. In this case, Demo reported $66.5 million in cash and cash equivalents. The company does have a large amount of total debt equating to ~$128.8 million, but the vast majority of this is long term debt.
Valuation
Domo is trading within 10% of its 52-week low at the time of writing. Now although a low stock price doesn’t directly mean a stock is undervalued, it can act as a starting point for further research, especially from a technical chart perspective.
The company also trades at a price-sales ratio of 1.3, which is 73% cheaper than its five-year average. If we take into account cash and debt, the company trades at an enterprise-value-to-dales ratio of 1.45, which is significantly cheaper than prior levels.
Guru investor Paul Tudor Jones (Trades, Portfolio) was buying shares of Domo in the fourth quarter of 2022 (according to his firm's latests 13F), during which shares traded at an average price of ~$15.51, which is ~23% more expensive than where the stock trades at the time of writing.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
2. Gen Digital
Gen Digital (GEN, Financial), formerly known as Norton Lifelock, is an IT software company that offers a range of solutions for clients. This company is most famous for its Norton Antivirus software, a common application on PCs.
Given a study by DataProt indicates there is a staggering 560,000 new pieces of malware detected each day, having strong anti-virus software is vital. Norton generally acquires its customers through a free trial methodology, which then causes a portion of buyers to purchase.
The company also has major partnerships with many internet service providers and even original equipment manufacturers to offer Norton software as standard on PCs.
Gen Digital has also branched into offering a VPN or “Virtual Private Network” service, which offers secure remote working.
Growing financials
Gen Digital reported strong financial results for the third quarter of its fiscal year 2023. Its revenue was $936 million, which beat analyst forecasts by $114.5 million and increased by a rapid 33% year over year.
This growth was driven by strong growth in its Avast anti-virus software. Former competitors Norton and Avast merged in November 2022, and thus are now in a much stronger position together.
The company also launched its Norton Privacy monitor assistant in Canada, as the company aims to focus on the privacy market, which is a hot topic currently.
Its overall third-quarter bookings increased by a solid 29% year over year, or 35% on a constant currency basis. Its “cyber safety” bookings also increased by a steady 4% year over year.
Gen Digital aims to focus on continued product innovation, improving the customer experience and offering upfront value to consumers. I believe this is a solid strategy, and thus I am not surprised to discover the company has strong retention on its products.
Moving on to profitability, the company reported earnings per share of $0.45, which beat analyst forecasts by $0.02, despite declining by 28% year over year. Keep in mind some of these numbers are slightly skewed since the merger.
Gen Digital has a solid balance sheet with $812 million in cash and short term investments. It does have fairly high total debt of over $10.1 billion, but the vast majority (over $9 billion) is long term debt and thus manageable.
Valuation
Gen Digital trades within 10% of its 52-week low at the time of writing.
Its price-earnings ratio is 16.1, which is 32% cheaper than the IT industry average. The company also trades at a price-sales ratio of 3.15, which is ~27% cheaper than its five-year average.
Jim Simons (Trades, Portfolio) of Renaissance Technologies was buying shares of Gen Digital in the fourth quarter of 2022, during which shares traded at an average price of $22.
Final thoughts
Both Domo and Gen Digital are interesting software companies that are trading close to their 52-week lows. Domo is a leading provider of data analytics and is poised to benefit from the growth in the “big data” industry, whereas Gen Digital is poised to benefit from the growth in viruses and malware across PC’s.
